What is PIPE funding?
Let’s begin with the definition of “PIPE funding” and how it differs from venture capital, private equity and other investment vehicles. PIPE stands for “Private Investment In Public Equity”. It is essentially the process resulting in hedge fund, venture and/or private capital investment into a registered public company in exchange for equity ownership, normally at a discounted price.
What is the relevant history of PIPE funding?
In the fourth quarter of 2007 there was a dramatic increase in the amount of funding provided to public companies due to the credit crunch extraordinary strains now inherent in the sub-prime marketplace. According to Robert F. Kyle, Executive Vice President of Sagient Research the PIPE market hit historic levels in 2007 with over $45 Billion raised in the fourth quarter alone. That one-quarter total exceeded any annual total over the past twelve years.
Why is PIPE funding growing so quickly?
Mark Twain once said “I am more interested in the return of my investment, rather than a return on my investment.” This statement echoes the primary advantage to an investor found in PIPE funding with regard to exit strategy. When an investor makes an investment into a company, a major concern is exit strategy. With PIPE funding the company is public HULT PRIVATE CAPITAL therefore the investor has control over his or her ownership and can buy more, or sell at any time. Private companies normally cannot provide investor liquidity until an exit strategy is identified and executed which normally comes at great risk and over an extended period of time. This is the reason PIPE funding has increased over the last 12 years. Another benefit of investing in public vs. private entities is disclosure. A public company is required to disclose financial information and is regulated by the SEC. Investors all over the world, including hedge and venture fund managers, institutional bankers and individual investors, view this information. Another main advantage for a public company is the ability of management to retain control. Venture capital and angel investors normally demand board seats and majority voting rights. In our experience, companies that take their company public and attain PIPE funding maintain majority ownership, allowing them to execute or modify their strategy to achieve the company’s growth objectives as they see fit.
Does your company qualify to go public?
Not every company is positioned to be a public company and we advise that companies always seek counsel from an industry expert specializing in PIPE financing and the DPO process.
– Would your friends and family invest in your company? If not, there is little chance anyone else would. This might sound simplistic, however in our experience this is perhaps the most powerful litmus test of all.
– Does your company have the potential to reach a national or even global market? For example, a local flower shop with 10 locations would not be in a good position to go public. However a flower shop with national growth aspirations such as nationalflowers.com may well be a viable candidate due to its national market plans and growth strategy.
– Does your company have a strong and experienced management team? A strong management team is the backbone of any company. Over the years we’ve seen a sharp increase in the number of start-up and early stage companies going public to raise capital. However, to attract investors these companies must demonstrate consistent revenue growth and/or a history of success within a related industry. We often use the example of a local banker who wanted to commercialize a golf ball he developed and patented to distribute nationally. With no history in that field, his chances of being successful in the public offering process were diminished. However, if that same inventor had a proven history with similar development projects, his chances of going public and obtaining funding, even without existing revenue, would be greatly improved.